Mortgage Rates Near Record Lows. How To Know If Homeownership Is Right For You
But how do you know if homeownership is right for you or whether you should continue renting? In this episode, we help you weigh the pros and cons of renting versus owning.
Of course there are some tools out there to help you decide, like a rent vs. buy calculator. (Here are a few we recommend: Trulia, NYT's The Upshot, Freddie Mac). But the decision to purchase or rent is about way more than just money. We walk you through six things to consider as you're making the decision.
1. Keep in mind: Owning a home is the No. 1 way most Americans build wealth.
The average net worth of a homeowner is much larger than that of a renter, says Alanna McCargo, vice president for housing finance policy at the Urban Institute. In 2016, the average homeowner's net worth was $231,420; the average net worth of a renter was $5,200.
2. Buying a house is not an automatic ticket to the good life, and it may not make you happier.
If you take wealth accumulation out of the equation, research hasn't shown definitively that buying a home makes people happier, says Elizabeth Dunn, a professor of psychology at the University of British Columbia. She studies how time, money and technology shape human happiness.
"You know, if anything, homeowners seem to experience a little bit more pain from their homes," Dunn says. Renters don't have to fix the water heater when it breaks, make sure their mailbox matches the other ones in the neighborhood, replace the roof every 15 years.
The costs of homeownership go well beyond the monthly mortgage payment, says Michelle Singletary, a personal finance author and columnist with The Washington Post.
"I'm still a big believer in homeownership — obviously, I've been a homeowner since my second year out of college," Singletary says. "I just believe that you need to take it slow, understand what it means."
3. Renting gives you flexibility.
Renters have one definite benefit over owners: It's a lot easier to pick up and move, whether to escape noisy neighbors or follow a job offer across the country.
Especially when you're younger, Dunn says, you may be happier having the flexibility to travel and teach English in Thailand and pursue other adventures like that, rather than spend money and time dealing with plumbing problems and leaky roofs.
4. The flexibility of renting comes with a cost: Rent will always go up.
Inflation alone pushes rents up over time — and if the neighborhood gets trendy, monthly rents can go through the roof.
But if you own your home (and you have a fixed-rate mortgage, which means your interest rates won't change over the life of your mortgage), your monthly payment is a fixed cost. McCargo says that this offers peace of mind. And as inflation rises, living in your home gets effectively cheaper over the long term.
"Not to mention, every single month, you're paying something down every time you make that mortgage payment," says McCargo, thereby building your equity in your home and reducing your debt load.
5. You don't need a big down payment to own a home.
Homeownership might have a lower price of entry than you think. A 20% down payment was once standard, but McCargo says the average today is 5% of the total.
Keep in mind that if you put down less than 20%, you'll likely have to pay a monthly private mortgage insurance (PMI). This can add hundreds to your monthly payments. On many loans, you can request to cancel the PMI once you have a loan to value ratio of 80% (meaning the home is worth 20% more than you owe.) The lender should cancel PMI automatically once the ratio reaches 78%. The exception is with FHA loans, where PMI is permanent unless you refinance.
First-time buyers can find programs that offer mortgages with even lower down payments. Some cities offer grants to help with down payments to encourage people to invest in their communities. A good place to go to find out about such incentives is your state's housing finance agency.
6. Owning a home can give you a sense of security — and that can be priceless.
Singletary was surprised by the profound sense of both security and accomplishment she felt from buying her own place.
"I had been raised by my grandmother, and the circumstances in which I came to live with her were not great," she says. "I was thinking, 'Wow, this is super cool — that this kid who was thrown away and almost ended up in foster care, here she is, at 22. I own my own home.' It was a great deal of satisfaction and pride that I had done this, against all odds."